7 little-known tax breaks for your 2012 return

These strategies could boost your refund — or reduce what you owe

By

BillBischoff

It’s already time to start thinking seriously about filing your Form 1040 for 2012, especially if you expect a refund. Here are seven little-known tax-saving goodies that could make your refund bigger or cut what you owe.

Deduct home mortgage points paid by someone else

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Assuming you itemize deductions, you can write off points (including loan origination fees) that you pay to take out a mortgage to buy your principal residence. Surprisingly enough, you can also deduct mortgage points paid by the seller on your behalf to sweeten the deal. In fact, the IRS actually requires you to claim the deduction. If this happened to you last year, don’t ask questions! Just follow the government’s directions and claim a deduction for the seller-paid points on Line 10 or 12 of your Schedule A. Source: IRS Revenue Procedure 94-27.

Deduct medical expenses paid by someone else

For 2012, you can only deduct unreimbursed medical expenses to the extent they exceed 7.5% of your adjusted gross income. AGI is the number at the bottom of Page 1 of your Form 1040. It includes all taxable income items and is reduced by certain write-offs such as alimony payments to your ex-spouse, deductible IRA contributions and moving expenses. In a Tax Court case decided in 2010, the IRS argued that a daughter could not deduct some medical expenses because she did not pay for them with her own money. Instead, her mother covered the expenses by directly paying the medical service providers. The Tax Court disagreed. The facts of the case demonstrated that the mother intended the payments to be gifts. Therefore, the Tax Court characterized the transactions as gifts from the mother to the daughter followed by payment of the expenses by the daughter with the gifted funds. So the daughter was allowed to count $24,559 of medical expenses that were actually paid by her mother in calculating her medical expense deduction. Source: Judith Lang, TC Memo 2010-286 (2010).

Deduct real estate taxes paid by someone else

Five tax breaks on the chopping block

The daughter in the aforementioned 2010 Tax Court decision was also allowed to claim an itemized deduction for $5,508 of local real-estate taxes that were paid directly to the taxing authorities by her mother. Once again, the facts of the case demonstrated that the mother intended the payments to be gifts. Therefore, the Tax Court characterized the transactions as gifts from the mother to the daughter followed by payment of the taxes by the daughter with the gifted funds. So the daughter was allowed to deduct the taxes that were actually paid by the mother. Source: Judith Lang, TC Memo 2010-286 (2010).

Claim breaks for supporting a struggling relative

If you helped out a financially struggling relative last year, you may be eligible for some tax breaks. They can range from being able to use favorable head-of-household filing status (if you’re unmarried), to claiming a $3,800 dependent exemption deduction, to bagging a medical expense write-off.

As explained earlier, you can only claim an itemized deduction for unreimbursed medical expenses, including health-insurance premiums, to the extent they exceed 7.5% of your AGI. That may seem like an insurmountable hurdle, but seniors can often clear it, especially if you remember to include the following:

Premiums for Medicare Part B coverage, which for 2012 ranged from $1,199 to $3,836 per covered person — depending on your income level.

Premiums for private Medicare Part C coverage (so-called Medicare Advantage HMO-type coverage which is supplemental to Part B coverage). Premiums vary depending on the plan, and they can be significant.

Premiums for private Medicare Part D coverage (prescription drugs). Premiums vary depending on the plan. Higher-income folks pay an “adjustment amount” in addition to the basic plan premium. For 2012, the adjustment amount can be up to $66.40 per month (up to $797 for each covered person for the year).

Premiums for private Medicare supplemental insurance (so-called Medigap coverage, which you don’t need if you have Part C coverage). Premiums vary depending on the plan, and they can be significant.

Surprisingly enough, the IRS says you can treat credit-card convenience fees paid to charge personal federal income tax bills (including estimated tax payments) as miscellaneous itemized deductions. However, you only get a write-off to the extent your total miscellaneous itemized deductions exceed 2% of your AGI. (Other miscellaneous expenses include union dues, the aforementioned job-hunting expenses, fees for tax preparation and advice, and investment expenses.) Fill out lines 21 to 27 of Schedule A to see if you can benefit.

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